Mutual Funds Risk-o-Meter

The Securities and Exchange Board of India (SEBI) has recently notified to make it mandatory for mutual funds to assign a level to schemes on the basis of certain parameters at the time of their launch. This decision was taken in order to help investors to make a more informed investment decision.

Background

  • SEBI decided to come up with the risk-o-meter on October 5, 2020 and it came into effect from January 1, 2021.
  • The October 5, 2020 circular of SEBI had made it mandatory for mutual fund houses to characterize the risk level of their schemes.
  • The risk level has to be on a six-stage scale starting from low, low to moderate, moderate, moderately high, high and very high.

About risk-o-meter

  • Risk-o-meter will be evaluated on a monthly basis.
  • As per the circular, the Fund houses needs to disclose the risk-o-meter risk level along with the portfolio disclosure.
  • It is mandatory for all of their schemes.
  • The risk level associated with the scheme is required to be published on their own websites and the website of the Association of Mutual Funds in India (AMFI).
  • It has to be made available within 10 days of the close of each month.

Previous risk level of Mutual funds

  • The mutual funds are having another risk-o-meter operating since 2015.
  • This risk-o-meter only shows the risk level of the category that they belong to.
  • The scheme does not reflect the risks associated with the individual schemes and its respective portfolios.
  • Thus, any category of the scheme was carrying same level of risk.

Significance of the new risk-o-meter

In the new risk-o-meter, the risk value and risk levels will be arrived at after going through the critical parameters like credit risk, interest rate risk, and liquidity risk. It will also take into account the parameters like market capitalization, volatility and impact cost. Thus, it will provide a more objective assessment of the risks associated with a particular scheme to the potential investors.

Association of Mutual Funds in India (AMFI)

It is an industry standards organization in the mutual funds sector. It was established in the year 1995. Most of the mutual fund’s firms are its members in India. The AMFI was established with the aim of developing the mutual funds market by improving the ethical and professional standards.

Securities and Exchange Board of India (SEBI)

It is the regulator of the securities and commodity market and is owned by the Government of India. SEBI was established on April 12, 1988. In the year 1992 it was given Statutory Powers under the SEBI Act, 1992.

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